Building a better safety net for small businesses
by Michal Grinstein-Weiss and Salah Goss
Northampton, MA –News Direct – The Mastercard Center for Inclusive Growth
Small business owners faced uneven financial challenges during the pandemic. We’ve all heard the trivia about the store owner dipping into his personal savings to cover emergency costs or payroll. While support came from Washington for some, it was often neither sufficient nor readily available.
New data is starting to shed new light on some of the dramatic disparities and challenges facing this engine of the U.S. economy. To research from the Social Policy Institute at Washington University in St. Louis found that small business owners were actually two to three times more likely to have personal financial difficulties in the past two years. Not only did these households’ personal savings plummet, many of them were unable to pay their basic bills and often faced food shortages.
And there was one particularly striking statistic that stood out from the data: Small business owners were two to three times more likely to experience loss of income or hardships such as skipped housing payments and food insecurity than those not. – business owners.
Those most affected by this economic upheaval have been black and Hispanic entrepreneurs. Lost in the success stories of large companies that survived or even thrived on the injection of some short-term funds from the CARES Act or the banks was a harder reality: The study documents how the majority of small owners businesses turned to friends and family instead, and black and Hispanic entrepreneurs were particularly dependent on their networks, with 62% and 67% respectively saying they relied on friends and family for support, compared to 49% of entrepreneurs. white.
Although black and Hispanic entrepreneurs often reported having access to loans from the government or financial institutions, these sources did not seem sufficient to prevent them from turning to friends and family for support as well. By reaching out to loved ones, business owners put additional strain on personal networks that in many cases were themselves already stretched. This use of personal savings or networks of friends and family can place entrepreneurs and their families in a precarious personal financial situation which ultimately threatens the growth of their business.
There is cause for concern about the current and future economic hardships we see in these historically vulnerable communities. While the direct hardships of these communities are now well known, over the next few months we will likely learn more about how entrepreneurial communities – who have often had to step in to help entrepreneurs when government support failed. was not enough – faced their own financial difficulties. in order to provide these lifelines.
Small business owners, especially minority entrepreneurs, need and deserve a better and reliable solution, and we must have the programs in place before the next economic storm hits. Our research indicates that several key characteristics are essential to include in this type of government assistance.
First, money needs to flow faster and easier through trusted channels. Digitizing the demand for and distribution of finance by community development finance institutions (CDFIs) and minority depository institutions (MDIs), frontline financial institutions, will speed up the process. These systems need to be put in place and integrated into other programs now, which will avoid much of the confusion and disconnections that delayed assistance during this crisis.
Second, we need to improve the financial strength of small businesses, especially minority-owned businesses, before the next crisis hits. A report by the Federal Reserve Bank of Atlanta showed that a majority of black business owners used their personal credit, rather than their business credit, for financing. The situation worsens when they are denied loans or do not have access to traditional financial services, opening the door to risky and expensive alternatives, such as payday loans and check cashing facilities. Alternatively, we have to create safe alternative credit and lending scoring models that prioritize historically excluded entrepreneurs to help ensure greater wealth and financial stability.
Finally, we could consider a benefits system that supports everyone, including smaller businesses. Benefits should be designed and delivered with the beneficiaries at the center of the process. We must build on the progress made in including the self-employed in the CARES Law as a means of reducing the risk of owning a small business, especially for vulnerable populations. We need to put in place a modern support system that is portable, people-centered and interoperable for small business owners, as well as their employees, as highlighted in a report by the Aspen Institute.
The pandemic has shown us all how precarious the financial situation of many small businesses is. It has exacerbated many of the existing economic inequalities in society. Now is the time to address the systematic changes that are needed to ensure that American entrepreneurs are ready and more resilient before the next storm.
In doing so, we must take a closer and more careful look at the unique situation and challenges of black and Hispanic business owners and ensure that more equitable, accessible, and reliable supports are in place. Because if we fail to strengthen these small businesses, the bottom line will fall for all businesses. If we do not provide more equitable access to finance, inequalities will only increase. And if we don’t adequately prepare these entrepreneurs for the next crisis, it may be the last.
Michal Grinstein Weiss is director of Institute of Social Policy, University of Washington in St. Louis and Salah goss is Senior Vice President, Social Impact, Mastercard Center for Inclusive Growth
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